Recently, there has been a growing skepticism about the nature of
corporate boards and their practices. In several prominent cases
including Enron, Tyco and WorldCom, corporate directors and officers
have been accused of malfeasance. One of the key problems cited
by critics has been the lack of accountability and transparency of
corporate dealings. With weak enforcement of existing laws and
inherent conflicts of interest in self regulation, structural reforms
are necessary to protect the average shareholder. Meaningful
reforms will also benefit corporations and directors themselves in so
far that it will potentially help them make better decisions thereby
reducing their liability.

Around the world, many nations facing problems of corporate corruption
and lack of corporate accountability have found a solution in the use
of cumulative voting. Cumulative voting offers an alternative to
the traditional voting system used to elect corporate board of
directors. By using cumulative voting, minority shareholders
garner a greater opportunity to have the board of directors accountable
to all shareholders rather than a narrow majority. Cumulative
voting is used by many major corporations to elect directors including
Sears-Roebuck and Company, Hewlett-Packard, and Toys 'R' Us.

Historically, the use of cumulative voting for the election of
corporate board of directors originated because of abuses of power by
railroad corporation executives during the last century. It seems
that these issues still exist in corporate settings today, and
therefore the use of cumulative voting for corporate boards should be
revisited.

Shareholder activists and socially conscious investment firms
frequently support the use of cumulative voting. CalPERS,
Parnassus Investments, Calvert and PAX World Fund all generally
advocate for the adoption of cumulative voting for the election of
directors.

The purpose of this report is to help citizens as well as activists
gain a basic understanding of what cumulative voting is and how it can
be used in the corporate world to give shareholders a greater voice and
hopefully prevent corporate corruption.The Case for Cumulative VotingIn most instances, a stockholder is entitled to cast one vote for each
share of stock that he or she owns every time matters are brought
before the stockholders for a vote. Voting for the corporate
board of directors is no exception to this rule. Unfortunately, this
one vote system frequently puts shareholders with a small amount of
stock, termed minority shareholders, at a disadvantage. Since
directors run for individual positions, minority shareholders are
unable to exert influence over any of the elections. Their small
number of votes translates to a very small sphere of influence, and
frequently minority shareholders are unable to elect directors who care
about the interests and priorities of minority shareholders.

By using an alternative electoral system, cumulative voting, minority
shareholders can have greater input and involvement in the election of
the corporate board of directors. Cumulative voting gives
minority shareholders the chance be more fairly represented on the
board of directors by allowing them to use all their voting power at
one time. Historically, the use of cumulative voting for the
election of corporate board of directors originated because of abuses
of power by railroad corporation executives during the last century.

In a cumulative voting system, the number of votes available to a
shareholder in any given election is equal to the number of shares
outstanding held by the shareholder times the number of positions up
for vote. All positions are voted on at the same time, and the person
with the highest amount of votes wins the election. The key difference
between cumulative voting and plurality voting is that these votes may
be voted in any possible combination and may all be cast for the same
director. For example, if shareholders were asked for five
directors, each share would be entitled to five votes, which could all
be cast for the same candidate. It is important to remember that
cumulative voting will only be used to elect the board of directors,
and is not applicable for other votes held by shareholders or the board
of directors.

The outcome of cumulative voting is that minority shareholders are able
to gain some representation on the board of directors of the
corporation and thus, at least can have some say in the management of
the corporation. In many cases, this enables shareholders to
elect a nominee that has similar interests and priorities. This
is accomplished by lowering the threshold needed to win one seat.
However, cumulative voting will not impact majority rule or create a
stalemate, as it preserves the right of the majority shareholders to
control the corporation.

If a corporation does not use cumulative voting, the number of
candidates running for the directorship positions is frequently equal
to the number of positions to be filled, thus giving no alternatives to
shareholders or purpose to the entire election process. In other
instances, the shareholders may be forced to vote for or against an
entire slate of nominees, leaving little space for individual
preferences. Although some critics fear that cumulative voting will result in a
hostile takeover, there are ways to avoid this scenario. The
corporation can adopt a poison pill amendment through their bylaws or
charter that allows company to hold authorized, preferred voting stock,
only to be issued in the event of a takeover. Such a provision
would allow the majority shareholders to retain voting control of the
company in such an event.

The Arguments in OppositionOpponents of cumulative voting frequently cite common reasons for
their opposition. Many believe that each director should
represent all stockholders, and therefore feel that a plurality vote is
the best way to achieve this goal. Others feel that cumulative
voting allows for the election of a director who feels accountable only
to a specific segment of the shareholders, and then may feel obligated
to address their interests and desires first. We should note here
though, that under the typical system, the entire board of directors is
usually only accountable to 51% of the shareholders or those with vast
shares of stock. Allowing the minority to hold one or two seats,
even, will not dramatically affect the board's decisions, but can
instead increase accountability and allow other perspectives to be at
least heard in the boardroom.

Another argument complains that cumulative voting can be used as a
hostile takeover tool by allowing the aggressor company to gain a
foothold in the target company. However, this could be preempted
by adoption of poison pill amendments or methods designed at preventing
takeovers. Opponents feel that the practice of cumulative voting
could lead to the election of incompetent directors or commercial
espionage. This argument still exists for corporate boards
elected with plurality voting. Critics also raise the issue that
special interest factionalism can exist in a system that uses
cumulative voting, which can hinder a company's performance. In
fact, cumulative voting should help reduce the existence of special
interest factionalism, giving minority shareholders a stronger voice in
the governance of the corporation.

Additionally, the use of cumulative voting frequently leads to
pre-meeting caucuses by the majority. Some would argue that these
meetings generally result in a reduction in information flow to the
board of directors as a whole, as well as in adversarial relationships
between the majority and minority board members. Opponents
believe that this tension interferes with effective board governance,
and thus is a valid argument against the use of cumulative voting.

more on state regulations governing cumulative voting for corporate boardsmore on cumulative voting

In Detroit, there have been three mayors in the past two years and the current one has come under scrutiny. Perhaps a system like instant runoff voting will help bring political stability to motor city.